Prospect of unstable minority rule a risk for Irish recovery

DUBLIN, April 5 (Reuters) - Five weeks of largely
ineffective attempts to form a government in Ireland has left a
weak minority administration as the only option to avoid a fresh
election, an unstable compromise that could paralyse policy and
stoke labour discontent.

Ireland became one of several euro zone countries left with
deeply fractured parliaments as voters angry at not benefiting
from an economic recovery ousted Prime Minister Enda Kenny's
coalition on Feb. 26 without opting for a clear alternative.

Ireland's central bank said last week that the impasse has
so far had little effect on the European Union's fastest growing
economy but warned that more protracted uncertainty could have
adverse consequences for economic growth.

"We are likely to enter a period of effective political
paralysis," said Philip O'Sullivan, chief economist at Investec
Ireland, who expects that the government will fail to pass a
budget in October, triggering another election.

"We think that the government will struggle to effect
meaningful policy actions to address the problems in housing and
aspects of public investment, with unhelpful implications for
competitiveness."

Kenny's Fine Gael remains the biggest party and is trying to
win support from independent lawmakers before asking the
country's second-largest party and historic rival, Fianna Fail,
to back it from the opposition benches on a vote-by-vote basis.

Investors are confident of no radical policy shifts under a
compromise between the centre-right parties. The economy is also
forecast to beat the rest of the EU for a third successive year
and Ireland issued its first 100-year bond at a yield of just
2.35 percent last week despite the political foot-dragging.

However there are major problems to tackle that threaten to
choke the recovery.

Eight years after Ireland was left with a surplus of houses
following a 2008 property crash, a decimated construction sector
has since failed to build even half the 25,000 homes needed each
year to meet demand, sending rents in Dublin back above peaks
and wiping out the gains of the recovery for many.

The cost and scarcity of housing, especially in cities,
threaten to damage investment among multinational firms that
employ almost one in 10 people and analysts say the government
must do more to cut the cost of building and revive activity.

Pressure is also building on services and infrastructure
starved of funding during the crisis, particularly as population
growth also outpaces the rest of the EU at a time when capital
spending is the second-lowest among the 28 members.

The country's struggling health service has been problematic
long before demographic pressures added to its woes, while six
years of almost unbroken industrial peace is quickly fraying, as
a recovering economy breeds contested wage demands.

EFFECTIVE POLITICAL PARALYSIS

However analysts predict a minority government will do well
to last two years and may not see the year out, severely
hampering its ability to implement reforms.

"I don't think Fianna Fail will want this to last that long,
by this time next year they will likely find an issue to pull
the government down on and things like opinion polls will have a
major impact and be quite destabilising in the meantime," said
Eoin O'Malley, politics lecturer at Dublin City University.

That would spell the end of a series of lasting coalitions
that have served Ireland well in the eyes of investors with the
most recent five years of stability credited with buttressing
tough reforms demanded in a three-year international bailout.

The minority administration envisaged - which may well be a
glimpse of the future after no one party managed to secure even
a third of the seats last time out - is proving difficult before
it even begins amid a deep mistrust between the main parties.

Both will propose their leader for prime minister for a
second time on Wednesday with little hope of success, triggering
talks between the two for the first time.

"You can't have a government that might collapse in three
months of six months, you can get nothing done," acting health
minister Leo Varadkar said last month.

"The civil service pull back from you, vested interest wait
you out and you need to do things that may be unpopular so
any government has to be stable. You can't do things with the
electoral Sword of Damocles is over your head."
(Editing by Alison Williams)